Why Every Day Can Make a Difference in Passing the “Means Test”

Purpose of the Means Test

This test is intended to determine if you have the “means” to pay a meaningful amount of money to your creditors over a reasonable time period. As such, you have to pass the means test before you are allowed to go through a Chapter 7 “straight bankruptcy,” which generally lasts less than four months, or instead are forced to do a Chapter 13 “adjustment of debts,” which generally lasts three to five years.

The Focus on “Income”

At the heart of the means test is a review of your income and expenses. For the majority of people, only the income side of this determination matters. That’s because if your income is less than a certain amount — the published median income for your family size in your state — you pass the means test without needing to go through the expenses side of the test. So it’s absolutely crucial to understand how income is calculated for the means test, because it’s nothing like you’d expect.

The Unusual Timing of “Income” for the Means Test

“Income” for purposes of the means test is determined NOT by looking at your last calendar year or tax year or the last 365 days before filing for bankruptcy. Instead, the test considers all income that you received precisely during the last six FULL calendar months before the date you file for bankruptcy, then multiplying that amount by two.

What’s important to note is that you do NOT count any income received during the calendar month in which your case is filed. For example, if you file for bankruptcy on November 30, you do NOT count income received from November 1 through November 30. Instead, you look only at the money you received precisely from May 1 through October 31 — the six full calendar months before November.

Include Virtually All Incoming Money as “Income”

This six-month income timing rule is combined with a very expansive definition of “income.” Almost all sources of money are counted as “income” for the means test, including, for example, bonuses and commissions, self-employment and business income, pension and retirement income (excluding benefits under Social Security), regular payments made by any third party such as child or spousal support and unemployment compensation.

The Difference that Filing One Day Sooner or Later Can Make

The effect of this unusual definition of “income” is that waiting to file your Chapter 7 case by a single day could potentially be the difference between completing your bankruptcy case under Chapter 7 without paying anything to your creditors and being bumped into a three-to-five-year Chapter 13 case in which you pay all you can to your creditors during that period of time.

How could this be? If your regular employment income is close to your applicable median income and you received some other kind of money — a year-end bonus, an unusual chunk of child support or money from almost any source — during the previous six months, that extra money could push you over the median income amount, creating the risk that you would not pass the means test and be required to go through a Chapter 13 payment plan. So depending on when that extra money arrived and when your bankruptcy case is filed, that money may or may not count for purposes of the means test.

Using the November 30 bankruptcy filing example above, if you received a bonus or some other chunk of money on November 1, that money would not count as long as your bankruptcy was filed during that calendar month, by no later than November 30. The only income that would count would be from the prior six calendar months, May 1 through October 31. However, if the bankruptcy were not filed until one day later, on December 1, the income that would then count toward the means test would be what you received from June 1 through November 30, thus now including that extra amount received on November 1.

Conclusion

The means test is indeed a complicated legal concept. And we have only touched here on the easiest part — the “income” portion. If you or your business is in the Dallas-Fort Worth area, I am here to help you pass the means test and address all your debt problems. Please call to set up a free initial consultation at 972-772-3083 , or contact us through this confidential online form. I look forward to the privilege of serving you.